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Israel Bond Yield Drops to 5-Month Low Before Inflation Report

Israel’s 10-year government bonds rose, pushing yields to the lowest level in five months, on bets the central bank will keep rates on hold after the inflation report tomorrow will show the prices increase was seasonal.

The yield on the benchmark Mimshal Shiklit note due January 2020 fell five basis points, or 0.05 percentage point, to 5 percent at the 4:30 p.m. close in Tel Aviv, the lowest since Feb. 15. The yield plunged 11 basis points over the past week.

Annual inflation rose to 4.2 percent from 4.1 percent, according to the median estimate of 14 economists surveyed by Bloomberg. The consumer-price index advanced 0.4 percent in June from the previous month, according to the survey. The increases are “seasonal” because of increased spending during the summer vacation and inflation will probably slow in the coming months, Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd., said by telephone.

“Yields are falling on expectations that borrowing costs won’t be raised at the end of the month,” Zabezhinsky said from Tel Aviv. “Signs of a slow recovery in the global economy, which impact exports and the local economy, increase bets inflation will moderate.”

Yields on Israel’s fixed-rate bonds due in September 2013 fell nine basis points this month to 3.9 percent.

Inflation exceeded the government’s 1 percent to 3 percent target for a fifth month in May, as the economy recovers from the global recession faster than most advanced countries. The Jerusalem-based Central Bureau of Statistics is scheduled to release June-price data at 2 p.m. tomorrow.

Less Hawkish Tone

Investors should buy Israel’s 10-year interest-rate swaps to benefit from declining borrowing costs in the future, Rogerio Oliveira, an emerging-markets strategist at Morgan Stanley in New York, wrote in an e-mailed report dated July 13.

“With headline inflation appearing to have peaked and inflation expectations being lowered, the Bank of Israel has started to verbalize a less hawkish tone,” Oliveira wrote. “Inflation can be expected to gradually move lower in the remainder of the year and in 2012.”

Ten-year swaps, which investors use to fix borrowing costs in the future, fell 5 basis points to 5.15 percent, the lowest level in a month.

Growth slowed to an annualized 4.8 percent in the first quarter from 7.6 percent in the previous three months, which was the fastest since 2006. The economy may expand at a pace below the Bank of Israel’s 5.2 percent forecast in 2011, Governor Stanley Fischer said July 7. Economic indicators published before the last interest-rate decision support the assessment that growth slowed in the second quarter from the previous three months, according to minutes of the June 27 decision released July 11.

Rates on Hold

Fischer will probably keep interest rates on hold at its July 25 meeting, according to 13 of 15 economists surveyed by Bloomberg. The central bank left the benchmark lending rate unchanged at 3.25 percent on June 27 after 10 increases in two years, citing concern over slower U.S. economic growth and the worsening of debt risks in Europe.

The shekel strengthened 0.5 percent to 3.4154 against the dollar at 5:18 p.m. The currency has weakened 0.5 percent over the past week.

“The Bank of Israel is considering whether inflation or global macroeconomic concerns are the bigger threat in its end-of-month decision,” Saar Golan, a trader at Tel-Aviv based Clal Finance Brokerage Ltd. wrote in an e-mailed report today. “There have been more signs of a slowdown in the pace of economic growth in the second and third quarter and a slowdown in housing transactions after several measures by the Bank of Israel and Ministry of Finance to cool the sector.”

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